EghtesadOnline: Having accomplished one goal of bringing a semblance of stability to currency market, the Central Bank of Iran will now concentrate on controlling inflation, the governor said.

“From now on, inflation will be the top priority,” Abdolnasser Hemmati wrote in his Instagram page, recalling past efforts to restore stability to the chaotic and currency market “in very tough economic conditions”.

The senior banker underscored the role of the newly launched Open Market Operation and changes in the CBI monetary policy to rein in galloping inflation, Financial Tribune reported.

CBI measures, however, should be accompanied by adopting effective and supportive policies to boost the non-oil sector of the economy, Hemmati reiterated.

A significant step toward boosting non-oil sector is to make macroeconomic variables predictable, Hemmati said, referring to moves to control unbridled inflation as a key variable.

It appears that for realizing its inflation targets the CBI has pinned much hope in its new monetary policy, which is to be implemented within the OMO framework.

The OMO and interest rate corridor (IRC) are the main components of the bank’s new monetary policy.

Under the IRC framework, the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move within this setup.

OMO, which become operational on Saturday, has been warmly welcomed by economic experts for its functions in regulating interest rates in the interbank market and harnessing the ballooning liquidity, which hopefully will keep inflation in check.

Experts, however, are of the opinion that some prerequisite should be in place for the efficiency of the new mechanism to deliver as planned.

Destined Role

OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce money supply.

Within this framework, central banks can buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates. By the same token, selling government bonds reduces the base money and raises interbank rates.

It constitutes a key instrument of monetary policy under the market based system of monetary management. Essentially, it is used by monetary authorities to regulate the cost and availability of credit in the banking system and influence the level of money supply.

In addition, within the framework, banks can hold bonds as collateral to borrow from the CBI.

Heydar Mostakhdemin Hosseini, a market analyst, ties the OMO success to the government ability to forge a balance in all its other financial, tax, budget and tariff policies.

In acknowledging the role of the OMO in improving economic variables, Mostakhdemin Hosseini emphasized that the policy will deliver the best results when implemented under normal economic conditions.

“The monetary policy should not be perceived as a panacea for all ills… it should be preceded by reforms in other (key) sectors,” ISNA quoted him as saying.

Need for Unambiguousness

Kamran Nadri, a bank expert, says the CBI should be unambiguous about the inflation targets it wants to achieve through the OMO process.

He pointed to the urgency to curb liquidity and limit the circulation of money as two main preconditions for all anti-inflation measures to be effective, recalling that the main driver of price inflation in Iran is the disproportionate economic growth rate in comparison to the ever-expanding liquidity.

The CBI in its last report showed 25.1% growth in liquidity by the end of third month of the fiscal year to June 21 compared to the corresponding month last year.

Liquidity stood at 19,799.1 trillion rials ($152 billion, calculated at open market USD rate) in the month, indicating a 5.2% rise compared to the last month of previous fiscal year (ended March 19, 2019).

The regulator reported annual liquidity growth at 23.1% for the final month of last year when it was 18,828 trillion rials ($144 billion).

The CBI has not published new data on liquidity but unofficial reports put the figure over 20,000 trillion rials and monthly liquidity growth at 28%.

This is while Iran's GDP shrank by 4.9% in the fiscal 2018-19 compared to the year before, according to the Statistical Center of Iran.

“In assessing whether or not the CBI’s new monetary policy works”, Nadri said, “we should wait and see if the OMO is capable of taming liquidity growth in the remaining days before the current [calendar] year is out [ March 19],” ILNA quoted him as saying.

Data released by the Statistical Center of Iran show average goods and services Consumer Price Index in the 12 months ending Dec. 21 increased by 40% compared to last year’s corresponding period.

SCI put the annual inflation rate for the preceding Iranian month that ended on Nov. 21 at 41.1%.